The rules adopted by the Securities and Exchange Commission in May boosted bounty awards to employees who report credible information about company corruption or other securities violations.

Under the rules, individuals who voluntarily provide the SEC with original information that leads to the successful enforcement of a federal court or administrative action in which the agency obtains monetary sanctions totaling more than $1 million will receive bounties of up to 30 percent of the penalty, and the awards are mandatory. Prior to the act, whistleblower awards were discretionary and capped at 10 percent.

The new rules also substantially broaden retaliation protections for employees who report suspected corporate wrongdoing to federal authorities, even in cases where no malfeasance is ultimately found.

In fact, “employees are not protected under the whistleblower provision unless they go to the government,” Shapiro noted. “Employees who try to resolve issues internally – by going to a manager or someone else in the best position to react – unfortunately, [if] the employer retaliates, that employee is not protected under the law.”

SEC officials say the rules are necessary to encourage employees to help prevent the kind of corporate fraud that has exacerbated the nation’s financial crisis. But business groups and corporate attorneys complain that the rules extend far beyond financial firms and take away a tool to help companies diagnose problems: internal employee cooperation.

What’s worse, they say, is that the bounty awards encourage some workers to wait until things get really bad and therefore more lucrative before they blow the whistle.

“Some employees – and I stress this is in a minority of cases – will let the issue percolate into a massive problem. They are going to wait until it hits the million-dollar amount to get a bigger windfall,” Shapiro said.

“Not informing the company of a potential fraud and waiting for the SEC to act is the equivalent of not calling the firefighters down the street to put out a raging fire and instead calling the lawyers from the next town to sue over the fire instead,” Lisa Rickard, president of the Chamber of Commerce’s Institute for Legal Reform, said in a statement after the rule was adopted.

But SEC Chairman Mary L. Schapiro said that the Dodd-Frank Act and its accompanying regulations have actually helped reduce the amount of faulty whistleblowing that could put companies under federal scrutiny without cause.

“While the SEC has a history of receiving a high volume of tips and complaints, the quality of the tips we have received has been better since Dodd-Frank became law,” Schapiro said during a recent SEC open meeting.

But Pillbury’s Shapiro questioned the effectiveness of the changes, noting that most employees who blow the whistle on genuine corporate corruption don’t do so out for the financial incentive, but because it’s the right thing to do.

“Real whistleblowers are generally not motivated by money,” he said. “Generally they are longtime employees who to try to do the right thing. … And they want to report it to the person or organization they trust the most to address it.”

Until now, that would most likely be a company manager, he said. But to be assured of whistleblower protection, the worker will now have to go directly to the government.

Chairman Schapiro said the program still encourages employees to report problems internally, and noted that federal officials have discretion to award higher bounties in cases where employees sought to report the problem internally first.

Linda Chatman Thomsen, a partner in the Washington office of Davis Polk and former director of the SEC’s Enforcement Division, noted that bounty program is still untested.

“No one has seen any of these bounties paid yet,” she said, pointing out that enforcement actions take some time. “It’ll be a little while before you see a successful action.”

Thomsen did stress that companies should not assume that Dodd-Frank regulations do not apply to them simply because they are not in the financial field. Even companies not regulated by the SEC are covered if company actions can affect the sale of stock.

“While the statute generally was directed at financial firms and the financial crisis, the whistleblower provisions apply broadly to anything related to the enforcement by the SEC and the [Commodity Futures Trading Commission],” Thomsen said.